Are we seeing a top for the pound?

Sterling is at its highest level since before the financial crisis.

The value of a nation's currency is influenced by many things, but the outlook for interest rates and economic growth play a big part.

Last week, the sterling index (which measures the value of the pound against the currencies of our major trading partners) hit its highest level since the endof 2008 (see chart).The pound also was at its highest against the US dollar in four and a half years.

The reasons for this strength are fairly straightforward. The economy is growing strongly. The unemployment rate has fallen below the 7% threshold once put forward by Bank of England governor Mark Carney as a cue to consider raising rates.

Wages are (finally) growing faster than inflation if you use the headline Consumer Prices Index (CPI) measure at any rate. And house prices are rising at their fastest rate for years, albeit skewed towards a bubbly London market.

As a result of all this, some analysts believe the Bank will finally have toraise interest rates to cool the economy down. Economists at Nomura and Santander, for example, think the Bank base rate will hit 1.75% by the end of 2015, compared to just 0.25% now.

Just as savings accounts with higher interest rates are more popular, currencies with higher interest rates (assuming the economy is also doing reasonably well) also tend to attract investors, which explains why the pound has been rising.

688_pound

CPI rose at an annual rate of just 1.6% in March, below the Bank's central target of 2%. The Bank is also keenly aware that many households still have very high levels of debt and could not cope with rates much higher than they are now.

Then there's the issue of the value ofthe pound itself. Several companies most recently, fashion brand Burberry are complaining that its strength is making their products more expensiveon world markets, and hitting their profits.

Minutes from the Bank's latest rate-setting meeting (in April) also highlighted the lack of inflationary pressure, while the vote to keep rates on hold was unanimous.

All in all, says Capital Economics, "it still seems unlikely that the Monetary Policy Committee will raise interest rates within the next year or so". A further rise in the pound is by no means certain.

Recommended

Currencies: the yen just keeps on tumbling
Currencies

Currencies: the yen just keeps on tumbling

The Japanese yen is trading close to a 20-year low with the US dollar, with the Bank of Japan in no rush to raise interest rates.
11 May 2022
Why has the Terra stablecoin broken its US dollar peg and should you care?
Bitcoin & crypto

Why has the Terra stablecoin broken its US dollar peg and should you care?

The Terra stablecoin is supposed to match the value of the US dollar – but its value has crashed. John Stepek explains what it means for you and your …
10 May 2022
The return of the currency wars
Currencies

The return of the currency wars

The post-2008 currency wars were all about the race to the bottom. The post-Covid world is very different, says John Stepek.
10 May 2022
If the US dollar keeps rising from here, it’s going to hurt
Currencies

If the US dollar keeps rising from here, it’s going to hurt

The US dollar is on a bull run, sending every other asset into freefall. And it's at a particularly critical point right now, says Dominic Frisby. Her…
4 May 2022

Most Popular

Get set for another debt binge as real interest rates fall
UK Economy

Get set for another debt binge as real interest rates fall

Despite the fuss about rising interest rates, they’re falling in real terms. That will blow up a wild bubble, says Matthew Lynn.
15 May 2022
High inflation will fade – here’s why
Inflation

High inflation will fade – here’s why

Many people expect high inflation to persist for a long time. But that might not be true, says Max King. Inflation may fall faster than expected – and…
13 May 2022
What the Ukraine crisis might mean for ESG investing
Advertisement Feature

What the Ukraine crisis might mean for ESG investing

The Ukraine crisis has brought many of the issues around ESG investing into sharper focus. Where does the sector go from here?
3 May 2022